Los Angeles-based Starpoint Properties LLC, a private real estate investment and management company, is cashing out some of its Southern California multifamily properties, to capitalize on retail opportunities nationwide.

Over the past year, Starpoint's portfolio has shifted from 90 percent multifamily and 10 percent commercial to a 70 percent multifamily/30 percent retail mix. With the recent launch of Starpoint Exchange LLC, a tenant-in-common (TIC) program focusing on 1031 exchange investments, Starpoint CEO Paul Daneshrad says the company is targeting a 50/50 mix in product types by the end of 2006.

Historically focused on value-added opportunities in Southern California, Starpoint is selling off its C- and D-grade multifamily properties at a cap rate of 4 percent to 5 percent and buying up Class A retail elsewhere at rates of 7 percent to 8 percent. “I'm amazed at how few multifamily owners are taking advantage of this tremendous opportunity,” says Daneshrad. “We're basically getting rid of the garbage at rates we'll never see again.”

The company recently sold an aging complex in a rundown neighborhood in the Beverly Hills triangle at a cap rate of 5; it purchased it at a cap rate of 9. Starpoint took capital from this sale and purchased Sawgrass Center, a new Staples-anchored strip center in Ft. Lauderdale across the street from the famous 2.2-million-square-foot Sawgrass Mills Mall, at a 7.5 percent cap rate.

“The multifamily market in Southern California has reached the point of irrational hysteria,” he says. “You shouldn't be able to swap class C and D product for class A property anywhere. Buying at 5 caps will only give you 2 percent to 3 percent cash flow, when a 10-year government bond gets 4.5 percent — and there's no risk!”

Noting that TIC investors are more concerned about income than appreciation, Daneshrad adds: “The commercial market just makes much more sense today, on a risk-adjusted basis.”

Brad Umansky, vice president at the Irvine, Calif.-based brokerage Sperry Van Ness, says Starpoint is taking two leaps in arbitrage, by taking advantage of the difference in cap rates between property types and geographic locations. “When you sell multifamily at 5 percent and buy retail at 7.5 percent, that arbitrages at 1.5 points in cap rate,” he says. “This is a double case, where they're selling at 5 percent, and instead of buying retail at 6.5 percent in California, they're going to other states like Florida, where retail is selling at 7 to 7.5 caps.

“It's harder to attract capital to markets outside California, so properties are trading at a higher return,” Umansky continues, saying the strategy fits with Starpoint's movement into the TIC market. “People who buy at 7.5 caps in Florida will get cash flow, but not as much appreciation as in California. tenant-in-common buyers want to get a check each month. They want cash,” Umansky says.